Daily Voice | Rate cut in H2 seems a low probability event, says this fund manager

Interest rate may remain elevated in 2023 as well. As per the current RBI glide path, CPI inflation is expected to come down to below 5 percent by mid-2023. We broadly agree with this inflation trajectory. RBI may adopt wait and watch approach to ensure that inflation consistently cools off below 4 percent.

Also, global central bank policies may also play a key role in shaping up off RBI policy. Given this backdrop, the possibility of rate cut in the second half of 2023 seems a low probability event unless Covid cases amplify out of government control or economic growth collapses below 5 percent levels (the possibility of which in our view is very low).

With the general elections due in 2024, do you expect the Union Budget 2023 to be a blockbuster? 

Budget has lost its relevance of single point big bang announcements. Government continues to focus on growth and reforms even outside the Budget. I expect the growth and reform led focus of the government to continue in upcoming budget.

What are your thoughts on the recent Sebi board meeting that touch upon many topics including share buyback?

I prefer to not address this question.

Do you expect smart rally in industrial metals in coming calendar year?

I would not like to comment on any particular sector. However, we are positive about manufacturing resurgence in India driven by multiple factors such as strong domestic demand, Indian emerging as a strong alternative to China as a sourcing hub, improving capacity utilization in the country equally aided by strong Corporate Balance sheets which carry very low leverage and strengthen banking sector in India which has put the asset quality woes behind it and is now eager to grow the balance sheets.

Capacity utilisation among manufacturers reached its highest level of 73.4 percent (3 months moving average) in 3 years (Source: Bloomberg). Debt levels of the listed companies have improved substantially in FY22, which we believe may lead to a pick-up in the new investment cycle.

Clean balance sheets of both banks and corporates and ample fire power at the disposal of banks (SLR balance) and the policy push towards manufacturing is the perfect combination required for a pick-up in private investments.

With the easing lot of concerns, are we completely out of woods now?

Most of the macro concerns of 2022 like high raw material inflation, global supply chain bottlenecks, covid related demand weakness, rising interest rates are peaking out. Most commodity prices including crude oil have declined substantially since it’s 2022 peak (Crude oil is down 29 percent in last 6 months) Source: Bloomberg.

In US, 10 year interest rates spiked almost close to 3.7 percent and in India 10 year G-sec rates are hovering around 7.3 percent (Source: Bloomberg). Incrementally, we think inflation would soften and rate hikes would be marginal. However, the recessionary fear talks and concerns that India cannot forever remain an island of prosperity in a slowing world have become louder.

If these concerns turn true and demand aka growth in India can take a hit, corporate earnings could disappoint the investors. Till this hypothesis is proven wrong, we would not be completely out of woods.

Do you expect 2023 to be much better year for equity markets than 2022?

Like mentioned above, markets are not completely out of woods yet. Whether 2023 turns out to be a better year than 2022 may depend upon the shape of the demand curve and ability of corporates to crawl back the normalised operating margins which are hit today due to sharp rise in input plus logistics costs.

Do you think this is a stock picking market now?

True. As the growth becomes narrow and scarce, broader market gains become rare and sparse. 2023 could see the stock picking coming to major play with only those companies’ showing signs of resilience and deliver on the market expectations to provide meaningful gains to investors.

Having said that, Volatility is the essence of the market. One has to embrace it. We are advocate of long-term growth of India hence we believe investor should continue to invest through SIPs to benefit from the long-term economic growth story of India. Nobody can time the market but if investor stick to companies with strong growth and capable management, wealth creation is inevitable.

Do you expect significant increase in government expenditure ahead of general elections 2024?

Like mentioned earlier, Budget has lost it’s significance as an instrument of messaging for political gains. The policy focus has shifted towards goal since 2019, when the government announced major corporate tax cuts. Since then, the earlier predicament of economic growth versus fiscal deficit has been clearly resolved in favour of the growth.

The Central government’s capex picked up pace with 27 percent CAGR since FY21 versus 13 percent CAGR during FY14-20 (Source: CMIE). Even in the current period, Centre’s Gross Fixed Capital Formation (GFCF), representing investments in the economy, grew 10.4 percent in Q2FY23 in real terms. So, we think irrespective of 2024 general elections, government expenditure to remain robust next year but not without due respect to fiscal prudence which we believe may maintain the current glide path of 4.5 percent by FY26.

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